SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549-1004
FORM 10-Q

Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934

FOR QUARTER ENDED January 28, 2006 COMMISSION FILE NUMBER 1-9656

_{LA-Z-BOY  INCORPORATED}

(Exact name of registrant as specified in its charter)

Registrant's telephone number, including area code (734) 242-1444

                                           None                                           

        (Former name, former address and former fiscal year, if changed since last report.)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. Check one:

                          Large accelerated filer     X           Accelerated filer                  Non-accelerated filer          

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

                                          Yes                                                             No    X      

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the lastest practicable date:

                       Class                                                                         Outstanding at January 28, 2006
Common Shares, $1.00 par value                                                                     51,712,844

LA-Z-BOY INCORPORATED
FORM 10-Q THIRD QUARTER OF FISCAL 2006

TABLE OF CONTENTS

PART I
FINANCIAL INFORMATION

Item 1. Financial Statements

LA-Z-BOY INCORPORATED
CONSOLIDATED STATEMENT OF INCOME

(Unaudited, amounts in thousands, except per share data)

*As a percent of pretax income, not sales.                                                                                            

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

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LA-Z-BOY INCORPORATED
CONSOLIDATED STATEMENT OF INCOME

(Unaudited, amounts in thousands, except per share data)

*As a percent of pretax income, not sales.
 

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

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LA-Z-BOY INCORPORATED
CONSOLIDATED BALANCE SHEET

(Unaudited, amounts in thousands)

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

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LA-Z-BOY INCORPORATED
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited, amounts in thousands)

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

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LA-Z-BOY INCORPORATED
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited, amounts in thousands)

        The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1: Basis of Presentation

The interim financial information is prepared in conformity with generally accepted accounting principles and such principles are applied on a basis consistent with those reflected in our 2005 Annual Report on Form 10-K, filed with the Securities and Exchange Commission, but does not include all the disclosures required by generally accepted accounting principles. In the opinion of management, the interim financial information includes all adjustments and accruals, consisting only of normal recurring adjustments, which are necessary for a fair presentation of results for the respective interim period.

Note 2: Interim Results

The foregoing interim results are not necessarily indicative of the results of operations which will occur for the full fiscal year ending April 29, 2006.

Note 3: Reclassification

Certain prior year information has been reclassified to be comparable with the current year presentation.  Most significantly, our consolidated statement of income has been reclassified for our discontinued operations.

Note 4: Earnings per Share

Basic earnings per share is computed using the weighted average number of shares outstanding during the period. Diluted net income per share uses the weighted average number of shares outstanding during the period plus the additional common shares that would be outstanding if the dilutive potential common shares issuable under employee stock options were issued. A reconciliation of basic and diluted weighted average common shares outstanding follows:

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Note 5: Inventories

     A summary of inventory follows:

Note 6: Restructuring

In the second quarter of fiscal 2006, the decision was made to close our Canadian upholstery manufacturing facility due to underutilization of capacity.  The plant closure occurred in the third quarter of fiscal 2006 and production was absorbed in other upholstery facilities.   Approximately 413 jobs are expected to be eliminated as a result of this closure.  There were 21 employees remaining at the Canadian facility as of the end of the third quarter of fiscal 2006.  During the first nine months of fiscal 2006, pre-tax restructuring charges for our Canadian facility were $8.7 million, or $0.11 per diluted share, covering severance and benefits, appropriate adjustments to our pension liability and the write-down of certain fixed assets.  During the third quarter of fiscal 2006, the decision was made to close a small 90,000 square foot upholstery manfacturing facility in Mississippi with production absorbed by other upholstery facilities.  Pre-tax restructuring charges relating to this closure were $0.4 million covering severance and benefits and the write-down of certain fixed assets.  Severance costs and other costs for our restructurings were expensed  in accordance with SFAS No. 112, Employers' Accounting for Postemployment Benefits and  SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities.  The write-downs were accounted for in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Somewhat offsetting these expenses for the uphostery restructurings was a gain of $0.7 million relating to the sale of two facilities in Mississippi idled as part of  previous restructurings.  We expect to dispose of these plants by sale.

In the first quarter of fiscal 2005, the decision was made to close three casegoods facilities, an upholstery plant and an upholstery warehouse.  The casegoods facilities were closed as a result of continued underutilization of our domestic casegoods facilities due to an increase in our importing of product from overseas.  The upholstery plant was closed and production was absorbed in another upholstery facility resulting in better production efficiencies.   The casegoods plants were closed in the third quarter of fiscal 2005.  Approximately 525 jobs were eliminated as a result of these closures.  During fiscal 2005, pre-tax restructuring charges were $10.3 million, or $0.12 per diluted share, covering the following:  write-down of certain fixed assets, write-down of certain inventories, payment of severance and benefits and other costs related to the shut down.  The restructuring expenses during 2005 were lower than we had originally anticipated because our charges to expense were offset by the gains on sale of assets in the fourth quarter of fiscal 2005 previously written down through restructuring.   The remaining assets relating to the restructurings were classified in assets held for sale.  The write-down was accounted for in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.  Severance costs and other costs were expensed as incurred throughout fiscal 2005 in accordance with SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities.  We expect to dispose of these plants by sale or abandonment if a sale is not practical.

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Note 7: Segment Information

Our reportable operating segments are the Upholstery Group, the Casegoods Group and the Retail Group. We acquired 21  La-Z-Boy Furniture Galleries® stores in the fourth quarter of fiscal 2005.  Combining these  acquisitions with existing company-owned stores, the retail operations became a significant part of our business.    Management determined based on the significance of the retail operations and the criteria of segment reporting as outlined in SFAS 131 Disclosures about Segments of an Enterprise and Related Information, that retail would be reported in its own segment.  We changed our internal reporting structure to the following three segments: Upholstery, Casegoods and Retail. All quarterly segment data was restated to reflect this change.   

Upholstery Group.  The operating units in the Upholstery Group are Bauhaus, Clayton Marcus, England, La-Z-Boy, La-Z-Boy UK and Sam Moore. This group primarily manufactures and sells upholstered furniture to furniture retailers. Upholstered furniture includes recliners and motion furniture, sofas, loveseats, chairs, ottomans and sleeper sofas.

Casegoods Group. The operating units in the Casegoods Group are American Drew, American of Martinsville, Hammary, Kincaid, Lea and Pennsylvania House. This group primarily sells manufactured or imported wood furniture to furniture retailers and the hospitality industry.  Casegoods product includes tables, chairs, entertainment centers, headboards, dressers, accent pieces and some coordinated upholstered furniture for the residential and hospitality markets. 

Retail Group. The Retail Group consists of 64 company owned La-Z-Boy Furniture Galleries® stores (“the retail network”).  The Retail Group sells mostly upholstered furniture to end consumers through the retail network . 

*Variable Interest Entities ("VIEs") are included in corporate and other.

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Note 8: Goodwill and Other Intangible Assets

In accordance with SFAS No. 142, trade names are tested at least annually for impairment by comparing their fair value to their carrying values. The fair value for each trade name is established based upon a royalty savings approach. Additionally, goodwill is tested for impairment by comparing the fair value of our operating units to their carrying values. The fair value for each operating unit is established based upon a combination of the discounted cash flows and the projected profitability of the market in which the entity operates.

In the fourth quarter of fiscal 2005, we acquired several La-Z-Boy Furniture Galleries® stores that were independently owned.  Relating to these acquisitions, we recorded goodwill of $11.3 million in fiscal 2005.   Additionally, in the fourth quarter of fiscal 2005, we completed a valuation of the tax reserves relating to an acquisition in fiscal 2000.  Due to the resolution of certain open tax items relating to the acquisition, a reduction of the tax reserves was required during fiscal 2005.  These reductions in the tax reserves were recorded as a reduction in the remaining acquired intangible assets, which consisted of trade names and totaled $6.4 million.  Furthermore, in the fourth quarter of fiscal 2005, the annual evaluation of goodwill and trade names was performed.  We determined that goodwill and trade names were not impaired as of the end of fiscal 2005.

At the end of the first quarter of fiscal 2006, we began consolidating a new VIE that had goodwill of $0.4 million.  During the second quarter of fiscal 2006, we sold our Englander trade name of $2.7 million, which was included in our Upholstery Group.

The following table summarizes goodwill and trade names at the end of the third quarter of fiscal 2006, third quarter of fiscal 2005 and the fourth quarter of fiscal 2005:

Note 9: Stock Plans

We account for our stock-based compensation plans using the intrinsic value method of recognition and measurement principles under APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations.  We adopted the disclosure-only provisions of SFAS No. 123, Accounting for Stock-Based Compensation, and SFAS No. 148, Accounting for Stock-Based Compensation–Transition and Disclosure.

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Assuming that we had accounted for our stock-based compensation programs using the fair value method promulgated by SFAS No. 123, pro forma net income and net income per share would have been as follows:

Note 10: Financial Guarantees and Product Warranties

We have provided secured and unsecured financial guarantees relating to leases in connection with certain La-Z-Boy Furniture Galleries® stores, which are not operated by the company.  The lease guarantees are generally for real estate leases and have terms lasting up to five years. These lease guarantees enhance the credit of these dealers. The dealer is required to make periodic fee payments to compensate us for our guarantees. We have recognized liabilities for the fair values of the lease agreements that we have entered into since December 31, 2002, but they are not material to our financial position.

We would be required to perform under these agreements only if the dealer were to default on the lease. The maximum amount of potential future payments under lease guarantees was $5.4 million as of January 28, 2006.

We have, from time to time, entered into agreements which resulted in indemnifying third parties against certain liabilities, mainly environmental obligations. We believe that judgments, if any, against us related to such agreements would not have a material effect on our business or financial condition.

Our accounting policy for product warranties is to accrue an estimated liability at the time the revenue is recognized. This estimate is based on historical claims and adjusted for currently known warranty issues.

A reconciliation of the changes in our product warranty liability is as follows:

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Note 11: Variable Interest Entities

Financial Accounting Standards Board Interpretation No. 46R, Consolidation of Variable Interest Entities ("FIN 46"), which was issued in December 2003, requires the "primary beneficiary" of a VIE to include the VIE's assets, liabilities and operating results in its consolidated financial statements.   In general, a VIE is a company, partnership, limited-liability corporation, trust or any other legal structure used to conduct activities or hold assets that either (a) has an insufficient amount of equity to carry out its principal activities without additional subordinated financial support, (b) has a group of equity owners that are unable to make significant decisions about its activities, or (c) has a group of equity owners that do not have the obligation to absorb losses or the right to receive returns generated by its operations.

La-Z-Boy Furniture Galleries® stores that are not operated by us are operated by independent dealers. These stores sell La-Z-Boy manufactured product as well as various accessories purchased from approved La-Z-Boy vendors.  In some cases we have extended credit beyond normal trade terms to the independent dealers, made direct loans and/or guaranteed certain loans or leases.  Most of these independent dealers have sufficient equity to carry out their principal operating activities without subordinated financial support.  However, there are certain independent dealers that we have determined may not have sufficient equity.  Based on the criteria for consolidation of VIEs, we determined that, as of April 24, 2004, several dealers were VIEs of which, under FIN 46, we were deemed the primary beneficiary.  In fiscal 2005, we acquired some VIEs or we found a new independent dealer with sufficient equity to own and operate that market of  La-Z-Boy Furniture Galleries® stores.   We became the primary beneficiary of one of our dealers at the end of the first quarter of fiscal 2006 due to a change in financial structure of the dealer.  

Additionally, there are certain independent dealers that qualify as VIEs; however, we are not the primary beneficiary.  Our interest in these dealers is comprised of accounts and notes receivable of $22.4 million.  We continue to evaluate the collectibility of our trade accounts receivable from these and our other  independent dealers and have provided an appropriate reserve relating to the collectibility of our receivables with these dealers or the contingent payout under any guarantees. 

Since some of our VIEs have either negative or no equity in their business, we are required to absorb their losses in our consolidated statement of income.    Our consolidated VIEs contributed $10.8 million and $14.8 million in sales, net of intercompany eliminations, during the third quarter of fiscal 2006 and fiscal 2005, respectively and $27.3 million and $38.1 million in sales, net of intercompany eliminations, during the first nine months of fiscal 2006 and fiscal 2005, respectively.   We also had a net income (loss) per diluted share of ($0.02) and >$0.01 during the third quarter of fiscal 2006 and fiscal 2005, respectively, and a net loss per diluted share of $0.06 and $0.08 during the first nine months of fiscal 2006 and fiscal 2005, respectively, resulting from operating results of our consolidated VIEs.  The VIEs had $9.9 million and $10.2 million of assets after eliminations of intercompany activity as of January 28, 2006 and April 30, 2005, respectively. 

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Note 12: Pension Plans

The net periodic pension costs were as follows:

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We are not required to make any contributions to the defined benefit plans in fiscal year 2006, however we may make discretionary contributions.  There were no contributions made to the plans in the first nine months of fiscal 2006.  The curtailment shown in the table above relates to the Canadian restructuring discussed previously in Note 6.

Note 13: Dispositions

On April 29, 2005, we completed the sale of our La-Z-Boy Contract operating unit for $11.0 million in cash and a note for $0.7 million.  This disposition qualified for discontinued operations treatment under SFAS 144.  Accordingly, the consolidated statement of income for the prior year has been reclassified to reflect the results of operations of this divested business as a discontinued operation.  La-Z-Boy Contract had $11.2 million and $35.4 million in sales in the third quarter and first nine months of fiscal 2005, respectively.  The assets and liabilities of this operating unit were not reclassified for fiscal 2005.  In the consolidated statement of cash flows, the cash flows of discontinued operations were not reclassified for the third quarter and first nine months of fiscal 2005.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Our management’s discussion and analysis is an integral part of understanding our financial results. This Management’s Discussion and Analysis should be read in conjunction with the Consolidated Financial Statements and related Notes to Consolidated Financial Statements. We begin the Management’s Discussion and Analysis with a cautionary statement concerning forward-looking statements, followed by an introduction of La-Z-Boy Incorporated’s key businesses, strategies and significant operational events in fiscal 2006. We then provide a discussion on our results of operations, liquidity and capital resources, recent accounting pronouncements, critical accounting policies and our business outlook.

Cautionary Statement Concerning Forward-Looking Statements

We are making forward-looking statements in this item. Generally, forward-looking statements include information concerning possible or assumed future actions, events or results of operations. More specifically, forward-looking statements include the information in this document regarding:

Forward-looking statements also include those preceded or followed by the words “anticipates,” “believes,” “estimates,” “hopes,” “plans,” “intends” and “expects” or similar expressions. With respect to all forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

Actual results could differ materially from those anticipated or projected due to a number of factors. These factors include, but are not limited to: (a) changes in consumer confidence; (b) changes in demographics; (c) changes in housing sales; (d) the impact of terrorism or war; (e) continued energy price changes; (f) the impact of logistics on imports; (g) the impact of interest rate changes; (h) the effects of any additional rulings on tariffs by the U.S. Department of Commerce and the potential disruptions from Chinese imports; (i) inventory supply price fluctuations; (j) the impact of imports as it relates to continued domestic production; (k) changes in currency exchange rates; (l) competitive factors; (m) operating factors, such as supply, labor, or distribution disruptions including changes in operating conditions or costs; (n) effects of restructuring actions; (o) changes in the domestic or international regulatory environment; (p) not fully realizing cost reductions through restructurings; (q) ability to implement global sourcing organization strategies; (r) the impact of new manufacturing technologies; (s) the future financial performance and condition of independently operated dealers that we are required to consolidate into our financial statements or changes requiring us to consolidate additional independently operated dealers; (t) fair value changes to our intangible assets due to actual results differing from projected; (u) the impact of adopting new accounting principles; (v) the impact from severe weather such as hurricanes and tornadoes; (w) the ability to turn around under-performing retail stores; (x) the impact of retail store relocation costs or the success of new stores; and (y) factors relating to acquisitions and other factors identified from time to time in our reports filed with the Securities and Exchange Commission. We undertake no obligation to update or revise any forward-looking statements, either to reflect new developments, or for any other reason.

Introduction

La-Z-Boy Incorporated is a manufacturer, marketer and retailer of upholstery product and a marketer of imported or manufactured casegoods (wood) furniture products. Our La-Z-Boy brand is the top brand in the furniture industry, one of the most preferred brands in the home and we are the leading global producer of reclining chairs. In addition, we own 64 La-Z-Boy Furniture Galleries® stores, which are retail locations dedicated to marketing our La-Z-Boy branded product. These 64 stores are part of the larger store network of La-Z-Boy Furniture Galleries® stores which includes a total of 336 stores. The network is the industry’s largest single upholstery source furniture retailer in North America. These stores combine the style, comfort and quality of La-Z-Boy furniture with a design center to help customers furnish certain rooms in their homes.

Our reportable operating segments are the Upholstery Group, the Casegoods Group and the Retail Group. Below is a chart that shows the organizational structure of La-Z-Boy’s three segments.

In terms of revenue, our largest segment is the Upholstery Group, which includes La-Z-Boy Residential, our largest operating unit. During the prior quarter we initiated a restructuring plan to close our upholstery manufacturing facility in Waterloo, Ontario and shift the plant’s production to other existing facilities in order to bolster our overall capacity utilization. We also import cut and sewn fabric kits to complement our leather kits that allow us to take full advantage of both the cost saving opportunities presented in Asia and the speed to market advantages of a United States manufacturing base. The Upholstery group sells furniture mainly to La-Z-Boy Furniture Galleries® stores, general dealers, and department stores.

Our Casegoods Group continues to make progress in year over year quarterly improvements in operating margin. We are now transitioned to an importer, blended with domestic manufacturing, so that approximately 74% of our residential casegoods finished goods was imported in the third quarter of fiscal 2006 compared to 52% imported during the third quarter of fiscal 2005. Over the past couple years, we have continued to rationalize our casegoods manufacturing capacities as we closed several casegoods manufacturing facilities. With the continuing change in worldwide supply, we were no longer competitive manufacturing certain products domestically and it became necessary to close these plants.

The Retail Group consists of company-owned La-Z-Boy Furniture Galleries® stores in nine markets ranging from the Midwest to East Coast of the United States. This group includes the 21 stores acquired in the fourth quarter of fiscal 2005. In two of those markets, the stores were previously consolidated as VIEs and were incurring significant operating losses. In the next few quarters, we plan to take the following actions to grow sales and improve the operating results for the Retail Group as well as take advantage of certain synergies between the company-owned markets:    

We believe that expanding our store network will generate the long term benefit of driving top-line growth as we capitalize on the larger urban markets. With the further penetration in these markets we expect to gain necessary efficiencies in advertising, distribution and administration to achieve desired profitability. Currently, 26 of our company-owned stores are in the New Generation format. Through these actions we continue to remain optimistic about the future performance of this new segment and we believe this segment will incrementally improve over the next two years returning to profitability within that time frame.

At the end of fiscal 2004, a new accounting pronouncement, Financial Accounting Standards Board Interpretation No. 46R, required us to start consolidating certain of our independent dealers who did not have sufficient equity to carry out their principal business activities without our financial support. During the 2006 first quarter, one of our independent dealers had a change in financial structure, which made us the primary beneficiary and required consolidation. The new VIE currently has four stores. The chart below shows the current structure of the La-Z-Boy Furniture Galleries® store network.

Results of Operations
Analysis of Operations:  Quarter Ended January 28, 2006
(Third Quarter 2006 compared with 2005)